Tuesday, 26 February 2013

No Growth, Low Growth or Local Growth?

Can anyone help with a conundrum that has been bothering me?

We are, notoriously, living through an extended period of low or no growth as measured in terms of GDP. Commentators are falling over themselves to debate whether we are now in a depression rather than simply a recession and there is on-going speculation about a triple dip and a sense that as a country we will remain well below the trend rate of growth for many years.

On the other hand, when one looks at the figures for the growth in GVA at local authority level right across the country the picture looks very different. Growth rates of 7% or more over the last two years are not uncommon.

Can these both be right? And if they are, what is the explanation for the apparent difference between a flat lining national economy and what would seem to be significant growth rates in the value of goods and services in local economies across the country?

In simple terms the relationship between the two is that GDP is equal to GVA plus taxes on products (such as VAT or excise duties) less subsidies on products. GDP can only be calculated at national level given these adjustments. There are also some important measurement issues to consider; for example GVA is estimated on a nominal basis (so there is no adjustment for the price of goods and services across the country) and GDP is at market prices. However, nominal prices would serve to explain differences between different parts of the country not to explain differences between GVA and GDP when the tax and subsidy adjustments are taken into account.

My initial hypothesis, however, picking up the last point, was that the difference between aggregate GVA and GDP might be explained by movements in those taxes and subsidies. For example, taxes may be down due to the recession (although GDP does not include business taxes such as corporation tax which we know has seen a substantial drop over the last year). Subsidies on products may have increased. In that scenario the combination of reduced tax and higher subsidy might explain the wider difference.

Another possibility is that the explanation lies in shifts in terms of the performance of different sectors. However, all other things being equal one might expect that such differential performance would be reflected in both measures although there will be a different balance between production, taxes and subsidies for each.

Yet enquiries to the ONS suggest that the movement in taxes and subsidies is not generally considered to have a significant effect although there have been increases in tax rates (most notably VAT) which would have an impact at the time at which the changes took place. An increase in rates does not translate automatically into an increase in tax take but the trend on VAT take has been upwards since 2009 and is forecast to rise further.

The ONS has also suggested that the significantly greater GVA growth compared to GDP is not a consistent phenomenon and that ‘since the beginning of 2008 GDP growth has been higher in four quarters, GVA in five quarters and level in the remainder’. I will admit to finding those figures quite surprising.

So can someone settle this once and for all and provide an explanation for the apparent divergence which otherwise seems to suggest relatively healthy growth in many parts of the country but a flat lining economy when considered nationally; they can’t both be right, can they?

I now prepare to be embarrassed by a statement of blinding simplicity which will put me to shame and send me scurrying away with my tail between my legs.